Dell splashes cash on SonicWall's powerful firewall erections

Buys up biz to lock down end-point to data center

By Timothy Prickett Morgan,
13 Mar 2012

Updated John Swainson, president of Dell Software, took control of the giant's nascent software business last week and has moved fast, using the Dell checkbook to snap up SonicWall – a firewall and threat-management software and appliance maker – for an undisclosed sum.

SonicWall, which was founded in 1991 by brothers Sreekanth and Sudhakar Ravi, sold Ethernet cards, hubs, and other networking gear. During the dot-com boom, the company launched a firewall and virtual private networking appliance aimed at small and medium businesses and the company took off – enough for SonicWall to go public in November 1999 on the NASDAQ. Four years later, SonicWall brought in a new management team, headed up my Matt Medeiros, who is still CEO at the company.

Back in June 2010, private equity firm Thoma Bravo teamed up with the Ontario Teacher's Pension Plan Board to acquire SonicWall for $11.50 a share, or $717m. At the time, SonicWall had $200.2m in cash and in its prior year ended in December 2009, SonicWall had $73.8m in product sales, which had fallen by 25.4 per cent over two years, while license and services revenues had grown by 26.4 per cent to $126.7m. The company's unified threat management tools accounted for 77 per cent of total sales, which content security management software accounted for 10 per cent, VPN products made up 9 per cent, and continuous data protection and backup software brought in 4 per cent. Net income at SonicWall in 2009 was $13.2m, nearly triple the income it netted in 2008 but less than half of what it gained in 2007.

Dell said in a statement that it was taking on SonicWall's 950 employees and "plans continued investments to grow this business." Dell said that SonicWall has over 15,000 resellers worldwide and that Dell plans to take the best of the SonicWall channel programs and mash them up with its own PartnerDirect programs – and also allow its own PartnerDirect peddlers to push SonicWall UTM software and its SuperMassive next-gen firewall.

In a conference call with Wall Street analysts this morning, Dell said that SonicWall had approximately $260m in revenues in the trailing 12 months and had over 300,000 active customers around the globe. Dell expects the deal to close in its second quarter of fiscal 2013, which ends in early August. On a non-GAAP basis, Dell reckons that SonicWall will be accretive to earnings in the second half of fiscal 2013.

SonicWall has made over 139 patent applications to the US Patent and Trademark Office, and 64 patents have been issued to date. This is one reason why Dell is interested in SonicWall. Another is that it wants to bulk up its security offerings, which include its SecureWorks service. Dell acquired SecureWorks in January 2011 for an undisclosed sum, and at the time SecureWorks had about $120m in revenues.

Another reason Dell wants SonicWall is that it reckons that the unified threat management market is worth about $2.4bn in 2011 and will grow to around $3.9bn by 2015. Also, the UTM appliance and software maker will beef up Dell's security product portfolio, thus:

Dell's security product portfolio

The idea is to secure the data center with SonicWall products; secure and manage client devices – PCs, tablets, smartphones, and so forth – with KACE appliances; back up and monitor files with AppAssure; and monitor threats and provide other security services with SecureWorks.

By the way, each part of that Dell product line has come from a recent acquisition. Dell bought the KACE control freak in February 2010 and just three weeks ago it snapped up AppAssure – which has more sophisticated data replication software than SonicWall. Dell did not disclose how much it paid for any of these businesses. KACE had 125 people when it was acquired, AppAssure had 230, and SecureWorks had 700.

Update

On that conference call, Swainson said that unified threat management was important to Dell because in emerging markets, many customers are buying their first UTM product, while in the established markets, many companies are in need of upgrading their existing UTM appliances. No matter where companies are located, they are all wrestling with more data spread out over more kinds of devices, as well as an increasing number of threats to their IT systems.

"Customers see security as one of their key IT risks – in some cases, their main IT risk," said Swainson.

Medeiros, who will be staying on at Dell along with SonicWall's other employees, said that during the past two years while being private, SonicWall had shifted more of its revenues to software and services and away from just hardware appliance sales. The idea is simple enough: get a recurring revenue stream because customers hang on to their appliances for a long time.

The other idea, said Medeiros, was to leverage Dell's foot-in-the-door in corporate data centers to get the SuperMassive UTM appliance into corporate accounts where in the past SonicWall might have been chosen for remote branch offices. Dell already had a reseller agreement with SonicWall to peddle the SuperMassive appliance, and in fact, the very first one that SonicWall sold was done in conjunction with Dell.

Of that $260m revenue stream, Medeiros said that about $130m of it was for software and support services, and that about two-thirds of that, or around $87m, is recurring subscription revenues. The overall business grew in the mid-teens in the past year, but the shift to software and subscriptions means that SonicWall has been building up its deferred revenues for software and subscriptions at the expense of hardware revenues. This was done on purpose.

But don't get the wrong idea. Medeiros said that the SuperMassive firewall had revenue growth in the mid-20s in the past year, compared to prior generations of hardware appliances. So hardware is still important to SonicWall – and will be important to Dell as well.

As for other potential acquisitions, Swainson said that he would have more to say in June at Dell's annual analyst meeting, adding that he had only been on the job a few weeks but that he was keen on adding any "software that leverages and complements the rest of the Dell portfolio." ®